Option Activity Alert: XLK, FCS, HGG, ADTN

XLK – Technology Select Sector SPDR ETF – A sizable short straddle on the Technology SPDR ETF comprises nearly all of the day’s options volume generated on the fund as of 1:00pm in New York. It looks like the investor responsible for the transaction is hoping to see the price of the underlying settle as close to $26.00 as possible by expiration day next month. Shares in the XLK, an exchange-traded fund that corresponds to the price and yield performance of the Technology Select Sector of the S&P 500 Index, increased as much as 1.0% during the session to secure an intraday high of $25.94. The straddle-strategist appears to have sold 15,000 calls and 15,000 in-the-money puts at the May $26 strike to pocket gross premium of around $1.08 per contract. The investor keeps the full amount of premium received on the trade if shares in the XLK settle at $26.00 at expiration. The trader may walk away with some portion of the total premium as long as the ETF’s shares trade within the range of $27.08 to the upside, and $24.92 on the downside, through expiration in May. The short-straddle player will also benefit from declines in options implied volatility and the passage of time, as both factors erode premium on the options and cheapen the cost of buying back the straddle, should he choose to do so, at some future date.

FCS – Fairchild Semiconductor International – May contract call activity on the semiconductor maker appears to be the work of an options player taking a bullish stance on Fairchild ahead the company’s Thursday morning first-quarter earnings report. Shares in the San Jose, CA-based company are currently down 1.2% to stand at $19.00 in early-afternoon trade. The options strategist initiated a debit call spread, buying roughly 2,200 calls at the May $21 strike for an average premium of $0.60 each, and selling the same number of calls up at the May $23 strike at an average premium of $0.20 apiece. Net premium paid to establish the bullish spread amounts to $0.40 per contract. The investor starts making money in the event that Fairchild’s shares surge 12.6% over the current price of $19.00 to surpass the average breakeven point on the spread at $21.40 by expiration day next month. Maximum potential profits of $1.60 per contract are available to the trader should shares jump 21.0% to exceed $23.00 at expiration. Options implied volatility on FCS is up 5.0% to arrive at 56.46% ahead of earnings. Fairchild Semiconductor was raised to ‘Sector Perform’ from ‘Underperform’ at Pacific Crest this week.

HGG – hhgregg, Inc. – Options traders scooped up May contract calls on the retailer of consumer electronics, home appliances and related services this morning to position for a rally in the price of the underlying by expiration day next month. Shares in HGG increased 3.0% during the session to touch an intraday high of $14.11. Perhaps call buyers believe the stock, which is trading up off its April 4, 2011, fresh 52-week low of $12.84, has bottomed out. hhgregg’s shares are down roughly 40% off a 2011-high of $22.75, and are down approximately 54.5% since May 28, 2010, when the stock touched a 52-week high of $30.98. Investors hoping to see today’s relatively modest rebound in HGG’s shares continue picked up at least 1,365 calls at the May $15 strike for an average premium of $0.38 each. Options traders exchanged 2,775 calls at that strike on previously existing open interest of 322 contracts. Buyers of the call options profit if the price of the underlying stock rallies another 9.0% over today’s high of $14.11 to surpass the average breakeven price of $15.38 by May expiration. The rise in demand for call options on hhgregg helped lift the overall reading of options implied volatility on the stock 19.0% to 48.15% by 12:50pm.

ADTN – Adtran, Inc. – Pre-earnings report activity in Adtran’s options on Tuesday included bullish plain-vanilla call buying in the April contract. Earlier in today’s session, some traders long call options in the front month were sitting pretty with the price of the underlying stock up as much as 5.4% at an intraday high of $43.86. But, it seems fortunes have reversed for the time being with ADTN shares erasing earlier gains, sliding 3.6% to $40.10 by 11:30am in New York. The manufacturer of high-speed digital transmission products reported earnings after the close of trading on Tuesday, posting better-than-expected profits of $0.52 a share. Trading patterns in April contract calls suggested a definite bullish bias this morning, although with the price of the underlying behaving erratically, two-way trading traffic has taken the place of earlier clarity. More than 15,600 option contracts changed hands on Adtran by 11:40am, with nearly 3 calls trading on the stock for each single put option in play. Morning activity was dominated by in- and out-of-the-money call buyers scooping up more than 1,100 calls at the April $43 strike for an average premium of $0.74 each. Total call volume at that strike has topped 2,100 contracts, which is substantial compared to previously existing open interest of 450 contracts.

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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